Canada moved into new territory this week by accessing global demand for its domestic currency debt through a landmark green syndication, the first such deal from a North American sovereign.
Although the Triple A issuer routinely uses syndications on the US dollar offerings that help fund its reserves, as well as for occasional ultra-long and inflation-linked government bonds, its C$5bn (US$4bn) seven-and-a-half-year green inaugural marked the first time it has opted to distribute a standard maturity, non-structured Canadian dollar bond through bookbuilding rather than auction.
As a result, Asian buyers that rarely participate in the sovereign’s auctions due to time zone differences and the currency’s low 2% share of global reserves were a notable feature of the deal. “I was impressed by the diversity of the accounts, particularly outside of Canada, with some very large Asian investors coming in,” said one lead manager.
Overall, international buyers accounted for an unprecedented 45%-plus of allocations. As much as 72% went to accounts classified as ESG investors, though this included both dark and light green buyers and it was unclear whether these categories received preferential allocations.
Other sovereign green issuers, such as the Netherlands, have used this approach to encourage ESG investors into deals.
Besides the novelty of its 24-hour bookbuild and green use of proceeds, the deal benefited from a broader “halo effect” around Canadian debt amid Ukraine and inflation-driven bond market volatility. “As we were running up to this deal, there has been more interest in Canada,” the banker said, citing recent provincial, agency and mortgage bond deals.
These factors contributed to the deal, for which pricing guidance began at 2.5bp over the July 2029 government bond, achieving a 2bp greenium. This was “where we had hoped to land, so from that perspective there was a good print also”, according to the lead manager, who termed the “a fantastic first step towards establishing a green programme”.
Although between C$1bn and C$2bn of more spread-sensitive demand was lost as the issuer tightened pricing, the final order book still exceeded C$11bn. This represented a record for any green bond in the currency.
Asset managers accounted for the largest part of the deal at 44%. Pension funds were 25%, bank treasuries 16%, central banks and official institutions 11% and other types 4%.
Lead managers denied that the December 2029 maturity – rather shorter than the 10 to 20-year tenors with which other leading sovereigns have inaugurated their green bond programmes – was a defensive response to market volatility.
Rather, investor marketing had narrowed the preferred tenor range to between six and eight years. With the sovereign having no December 2029 conventional bond despite its normal pattern of July and December maturities for its 10-year benchmarks, this point on its curve was the obvious candidate – particularly as the sovereign did not want to adopt the “twin bond” strategy adopted by its G7 peer Germany of issuing identical green tranches of existing conventional bonds.
Deputy prime minister and minister of finance Chrystia Freeland said that the deal will be “the first of many issuances to come” as Canada moves to issuing green bonds at least annually.
It is not yet clear whether the sovereign will now seek to concentrate liquidity in its first issue or build out a green yield curve.
“Canada has the choice to do either. They haven't really given us a steer one way or another,” the lead manager said, though their advice would be to broaden the green offering with additional maturities.